Nonprofit Telligen to become an employee-owned company

When Telligen CEO Jeff Chungath and his executive team began looking into new ownership models for the 40-year-old nonprofit, becoming an employee-owned company quickly rose to the top of the list.

The West Des Moines-based nonprofit, which was known as the Iowa Foundation for Medical Care until rebranding itself two years ago, was founded by physicians as a peer review organization. However, over the past four decades, the organization’s mission of improving health care quality and reducing costs has broadened significantly.

“There are a lot of organizations and associations vying for physicians’ attention, both medical associations as well as new health care structures such as accountable care organizations,” Chungath said. “Health care is even changing to where you’ve got care teams that are responsible for the delivery of health care, to include not only the physicians but also nurses, therapists and long-term care specialists. So we wanted to look at that and say, how can we be best structured to serve this new structure?”

After deliberating the change for nearly two years, Telligen’s board recently made a formal resolution to adopt an employee stock ownership plan, or ESOP. The nonprofit hired Principal Financial Group Inc. to take it through the next steps, Chungath said. “It’s a very complex transition, and we’re trying to work with local companies to do that,” he said.

Telligen will be structured as two entities: an employee-owned company and a community initiatives subsidiary.

“What I found most appealing about it (the ESOP model) it is that it allows the company to be pretty centered on where it started,” Chungath said. “With a lot of other structures we were looking at, there was a possibility you could get merged or sold. A large part of our employee base is in Iowa; our thought was that we wanted to pick a structure that also recognizes we’re an Iowa-based company.

“And the other thing is, as a nonprofit, you’re very mission-centered - to improve the quality and costs in health care through providers and members (the population). An ESOP allowed us to be very centered around that mission, but at the same time, to be more relevant to where health care is going.”

Under the new ownership structure, the nonprofit initially will own the new ESOP company that’s formed. Telligen’s employees will gradually build their ownership stake by paying into Telligen’s charitable nonprofit foundation. Consequently, the foundation will be better endowed than ever before, Chungath said.

Currently, the foundation provides approximately $150,000 annually in community grants in Iowa and Illinois and has done so for the past 10 years. With the new ownership structure, the foundation should be able to significantly ramp up the number of health care scholarships and grants it makes.

“My dream is to have this be the Robert Wood Johnson or Kaiser Foundation of the Midwest,” Chungath said. “It’s going to give out money to fundamentally transform health care.”

Quality and cost

One of the best examples of Telligen’s work can be found in its contract with Oklahoma’s Medicaid agency. An independent evaluation of the SoonerCare Health Management Program that Telligen administers for the Oklahoma Health Care Authority found that the program saved the state $139.2 million over the past four years. The evaluation also concluded that Telligen was able to improve the quality of care given by participating providers and has helped the program to achieve high levels of patient and provider satisfaction.

All of Telligen’s work is centered around health care quality and cost, said Jeff Chungath, who has been the nonprofit’s CEO for the past three years.

“The best moniker to describe what we do is population health management,” he said. “We look at both large and small populations of people for the federal government - Medicare and Medicaid - and also for commercial self-insured employers.”

A majority of the company’s workforce has clinical expertise, such as physicians, nurses, pharmacists and quality improvement specialists. Telligen also has technical experts who specialize in data warehousing, statistical analysis and developing information technology applications.

At the state level, Telligen has contracts with Iowa, Illinois, Minnesota and Oklahoma and is also involved in 16 national health quality initiatives. It also works with the Iowa Medicaid Innovation Center and with commercial clients on a national basis.

State law encourages new ESOP formation

In May 2012, the Iowa Legislature passed a bill that provided capital gains tax relief for business owners interested in establishing an employee stock ownership plan. Under that law, a business owner who sells at least 30 percent of the company to an ESOP can exclude 50 percent of the capital gains from Iowa capital gains tax.

Earlier this year, the Legislature approved a measure that appropriates $500,000 per year to help businesses offset the costs of conducting feasibility studies to determine if forming an ESOP is an appropriate business strategy. The fund is administered by the Iowa Economic Development Authority with assistance from ESOP experts. An applicant to the program may be approved for financial assistance of up to $25,000 to pay for 50 percent of the cost of a feasibility study conducted by an independent financial professional.

“It certainly, at a miminum, has increased the tire kicking that’s going on,” said Jerry Ripperger, director of consulting with Principal Financial Group Inc. and an ESOP expert. “We’re having more conversations with people to determine whether it’s appropriate.”

Several factors are converging to make ESOPs more attractive, among them the demographic shift of the aging baby boomer population, Ripperger said. “And we’re finally seeing a loosening of the credit markets for borrowing to make this happen,” he said.

Creating an ESOP has a higher cost of entry than many other types of ownership plans, said Keith Gredys, president and CEO of Kidder Benefits Consultants Inc. in West Des Moines.

“Many times that’s where people stop (after seeing the cost),” he said. “Having that state benefit will help.”

An additional caveat is that the cost of managing an ESOP is significantly higher than any other plan, Gredys said, “so you have to be very careful going in, because it’s a very strategic and long-term direction being taken by the employer. Of course, tax incentives always help,” he said, referring to the 50 percent exclusion on capital gains for eligible transactions.

Information about the program so far has been spread by word of mouth, Gredys said. “CPAs need to be more aware of it than they are (in order) to tell clients about it,” he said. “I see this as being more widespread, but it’s in its early stages.”

The Iowa Economic Development Authority is still in the rulemaking stage for the technical assistance grant program. It has put together an ESOP advisory group that includes ESOP professionals and representatives from current ESOP companies to make recommendations on businesses that apply for the grants, Ripperger said.

Funding should be available retroactively to July for companies that have been working toward an ESOP once the rules are finalized, which should be late this this year. “Practically speaking, we’re looking at early 2014 transactions at this point,” Ripperger said.

The economic development authority plans a series of nine presentations across the state with private partners to introduce businesses to the new incentives and to answer questions; dates and locations are still being determined.